Last Friday, Australian website Smarthouse claimed to have word from a Toshiba representative saying that Microsoft and Toshiba are working on an Xbox 360-based entertainment machine that will incorporate an HD DVD drive.

The information ran contrary to what Microsoft has said in the past regarding the never including an HD DVD drive in the Xbox 360 for cost reasons, and that DVD media is still perfectly adequate for this generation of games.

The speculated machine discussed last week, however, supposedly would not be a strict gaming machine, but rather a home media box.

UK-based Stuff spoke with a local Toshiba contact regarding the report and received a denial of development for any such product. “It’s got nothing to do with us,” said the Toshiba representative. “But we know Microsoft doesn’t want to include the HD DVD drive so as not to limit the user’s experience.”

With the rapidly falling prices of HD DVD hardware, it’s conceivable that Microsoft could add an HD DVD drive in a variant of its Xbox 360 console at minimal charge. The added ability to play HD DVD movies would provide a strong bullet point feature to match-up against the PlayStation 3’s Blu-ray Disc playback. Furthermore, with the addition of HDMI in all new production Xbox 360 consoles (though still lacking proper lossless audio output), Microsoft’s machine is one step closer to becoming a full-HD DVD standalone replacement.